Presumptive Taxation for Freelancers Under Section 44ADA

Recently I read a document published by Income Tax Department on Presumptive Taxation. I found this document very useful.

It deals with how freelancers, self-employed people like bloggers can pay income tax. 

Hence, I thought to write a blog on presumptive taxation specially highlighting section 44ADA.

Earlier, the section 44ADA under presumptive taxation was not there. 

It was only introduced in Finance Act 2016 (FY 2016-17). 

What was the purpose?

The bigger objective was to increase the tax compliance of “Specified Professionals” (engaged in small business).

Who are specified professional?

Most common examples are doctors, full time bloggers, photographers, consultants, interior designers, teachers, contract employees, etc. 

What was the need?

Before introduction of section 44ADA, professionals were required to do the tedious task of “account bookkeeping”.

Account bookkeeping was necessary for income computation. 

Income = Sales – Expenses – Depreciation.

Traditional way.

But in 2016, GOI made Presumptive Taxation available for professions as well (income < 50 lakhs). 

This has made the “income” and “income tax liability” calculation very simple for these professionals. 

#1. What is Presumptive Taxation Scheme (Section 44ADA)?

This is a taxation scheme which has been specifically designed for small tax payers (engaged in small business).

How a small business is defined? Total annual income less than Rs.50 lakhs. 

Presumptive taxation scheme (section 44ADA) provides relief to these small business men. How? In two ways:

First: Minimum profit/income of 50% of total gross receipts is assumed. 

Income = 50% of Total Gross Receipts

Means, if a person earned Rs.100,000 in a year. Under presumptive taxation rule of sec 44ADA, the profit will be 50% of 100,000 = Rs.50,000.

It means, income tax to be paid only on the computed profit of Rs.50,000.

Isn’t it simple? Otherwise the person would have to do it using the below formula:

Income = Sales – Expenses – Depreciation.

Traditional way.

This where the second relief comes in the form of less paper-work required to pay and file income tax returns. How?

Keeping a track of all expenses, depreciation etc often becomes too tedious for small business men.

There is no need to “maintain book of accounts” for business men paying tax under presumptive taxation scheme. 

#2. Deduction Allowed in Presumptive Taxation Scheme (Section 44ADA)?

After presumptive income calculation @50% has been done, no further “business expense” is allowed as deduction. 

But a freelancer/blogger/individual, who has spent the income proceeds on the following are allowed as deduction:

• 80C (Max Limit: Rs.1.5 Lakhs)
  • Life Insurance policy, Tuition fees, Pension plans, 
• 80D (Max Limit: Rs.25-50 Thousand)
  • Health insurance policy
• 80E (Max Limit: Full amount)
  • Education Loan.
• 80EE (Max Limit: Rs.2 Lakhs)
  • Home Loan
• Etc…

These personal expense will qualify for deduction under section 80. 

Just like any salaried person, a freelancer/blogger can also claim deduction under section 80 of income tax act. 

#3. Income Tax Slabs Applicable in Presumptive Taxation Scheme.

The same tax slabs as applicable to a salaried individual will be available for a freelancer.

What are those tax slabs?

• Upto Rs.2.5 Lakhs – 0%.
• Rs.2.5 to 5.0 Lakhs – 10%.
• Rs.5 to 10.0 Lakhs – 20%.
• Above Rs.10.0 Lakhs – 30%

Lets see this in an Example:

Suppose there are 3 freelancer’s whose total gross receipt in FY 2016-17 was as below:

• Person 1: Rs.6,00,000.
• Person 2: Rs.12,00,000.
• Person 3: Rs.18,00,000.

There are two cases here:

• Case1: Deduction u/s 80 is zero.
• Case2: Deduction u/s 80 is Rs.100,000

What will be the income tax payable under presumptive income tax scheme?

#4. How to pay tax?

As per rules, if ones computed total tax due is more than Rs.10,000, it must be paid as advance tax. 

What it means by advance tax?

For a normal person, advance tax means, all tax dues must be paid in advance as per the below schedule:

• 15% of Total Tax Dues – On or before 15th June.
• 45% of Total Tax Dues – On or before 15th Sep.
• 75% of Total Tax Dues – On or before 15th Dec.
• 100% of Total Tax Dues – On or before 15th Mar.

But for a person who has to pay tax as per presumptive taxation scheme, all tax must be paid before 15th Mar. Following the above tight schedule is not necessary. 

Lets see the difference as highlighted in table below.

Suppose there are two individual whose total tax liability for the year is Rs.100,000. But one person is a normal salaried person and the other is a freelancer using presumptive taxation scheme. 

How differently both of them will pay their taxes?

* Cumulative tax to be paid by:

After 15th March, the tax dues should be zero.

Read more on advance tax payment here…

#4.1 Which ITR form to be used while filing income tax return?

Freelancers/full time bloggers cannot file their returns using ITR-1.

ITR-1 is only for salaried people whose income is below Rs.50 Lakhs. 

ITR-4 form must be used in case the person has paid income tax on presumptive taxation basis. 

Final words…

Presumptive taxation scheme is a good tool that small business men can utilise for their advantage. 

This scheme makes tax computation easy, hence leads to more tax compliance. 

In last decade or so, a lot of startups, freelancers, self-employed people has come into existence in India. 

Earlier Presumptive Taxation system was not open for professionals (freelancers etc).

But now with introduction of section 44ADA, even professions can utilise presumptive taxation rule. 

It is one of the most welcome move by the GOI to promote self-employment. How?

Because it greatly adds to the factor of “ease of doing business” in India.